Virgin to swallow a $450m pill, sell Tigerair A320s

Virgin Australia will take a one-off $450 million hit to its full-year earnings to fix its balance sheet.

One of the Tigerair A320s that Virgin will sell.

Virgin Australia will take a one-off $450 million hit to its full-year earnings and sell Tigerair’s entire fleet of Airbus A320 planes as part of its ambitious, three-year cost-cutting program to repair its balance sheet.

Virgin revealed the financial whack and plans to rationalise its aircraft fleet yesterday as it laid bare the terms of its $852m capital raising that would be primarily used to chip away at its mountain of debt.

The airline said the bulk of the impairments and restructuring costs associated with its three-year cost-cutting plan would be recorded in the final quarter of its 2016 financial year. This included $100m in restructuring costs and $175m in non-cash balance sheet impairments from its cost-saving program that would see Virgin sell underused aircraft, rationalise its supply chain and reduce jobs across crew, ground, maintenance and engineering operations.

Virgin decided to record those costs in the last quarter of the 2016 financial year so they don’t weigh on the airline’s balance sheet going forward.

Another $175m in restructure costs and asset writedowns that were recorded earlier this year meant the airline would be hit with a $450m hole in its full-year result.

Despite the one-off costs, Virgin still expects to post an underlying profit before tax of between $30m and $60m for the 12 months to June 30. Impairments and write-offs ­totalling at least another $100m are expected to be spread over the next three years as Virgin completes the cost-saving program that will help the airline save up to $300m from the end of the 2019 ­financial year.

Those savings are expected to come from the reduction of Virgin’s aircraft fleet that would see the sell-off of its Embraer 190 planes and the divestiture of all of the Airbus A320s used by its low-cost carrier Tigerair. Those 14 A320s will be gradually replaced with Boeing 737s from Virgin’s fleet as it received new aircraft.

Virgin has about 40 Boeing 737 MAXs on order to replace the 737s that will be sent to Tigerair, but deliveries of the new aircraft are not expected to flow until 2018.

The restructuring costs and impairments to Virgin’s business came as investment bank UBS yesterday invited minority shareholders to bid into an $852m capital raising for the airline. The launch of Virgin’s entitlement offer came with a list of 46 “key risks” spread across 17 pages in a presentation it released to the ASX yesterday.

Some of those key risks include: increased competition from Qantas; continued financial losses at Virgin; fluctuations in fuel ­prices; and future funding uncertainties. But despite those warnings and the costs of its restructure, investors yesterday responded positively to Virgin’s capital raising, sending shares in the airline up 2.5 per cent to 20.5c.

The $852m raising will be issued as a one-for-one non-renounceable offer to shareholders at a price of 21c a share.

At the time of the announcement, the share offer represented a 28.8 per cent discount to Virgin’s closing price of 29.5c on June 14.

The capital raising will be used to repay a $425m loan to shareholders and tackle the $3bn in debt that Virgin carries on its books.

Virgin’s major shareholders — Singapore Airlines, Virgin Group and its newest additions HNA and Nanshan group — have made commitments to participate in the capital raising. However, Virgin’s other major shareholder Etihad has made no commitment.

Etihad did not respond to questions about its intention to participate in the capital raising. Should the Abu Dhabi-based carrier not participate, its 21.8 per cent shareholding in the airline will be diluted to about 11 per cent.